Pensions are complex things. Rules, regulations and – a feature of recent years – changes to the rules and regulations.
The Lifetime Allowance (LTA) for pensions is actually a limit, not an allowance. If you have UK pensions totalling more than £1 Million you will be taxed on the amount over the limit at 55% when drawing capital. The limit started at £1.8 Million but has been reduced to the current limit of £1 Million. Could it go lower? Yes, there is no reason why not.
It would save the government by reducing pension contributions that get tax relief and at the other end, if peoples’ pension pots go over the limit, the government gets extra tax. And with the introduction in the UK of a Lifetime ISA, it is possible this will take over from pensions as we know them today. Especially as there is no tax relief as the money goes into the Lifetime ISA, saving the government £50 Billion per ANNUM¹ in tax relief. The amount of tax collected because of the limit on how much you can have in your pension, in 2015-2016, was £126² Million. And the limit was £1.25 Million then, not the £1 Million now.
So, if you live in Spain can we help with this issue? We can! The secret to this type of planning is to look forward. The best way of examining how to do this is to look an example:
A person, aged 58 with a pension valued at £821,000. Other assets outside the pension (property, investments, state pension) will provide more than enough for the person to live on in retirement so they do not need to draw their pension. They wanted to leave the money in their pension to their children as there will be no UK Inheritance Tax on this money on their death.
If £821,000 grows at 5% pa, at 75 (when the last LTA check is made) the fund is estimated to be worth £1,851,512 – significantly above the £1 M lifetime allowance. On this figure the tax from the LTA will be £468,331 (851,512 * 55%).
By moving this to an Overseas Pension (QROPS) the last calculation for LTA is made at the point of transfer.
In this example, at the point of transfer the value is less than the LTA. There is no additional tax to pay; nor is there an extra calculation at age 75, nor a tax charge.
By making this relatively simple change I saved the client £468,331 in tax. Of course, I have simplified this example but by looking forward to the problem at age 75, we were able to do something to mitigate the issue. Also, before implementing this planning I went through a series of checks and balances to make sure it was indeed the right thing to do for the person and their family.
As you can imagine this person is a happy client. If you have retired early, expect a large inheritance or have already accumulated wealth outside your pension, I will be happy to discuss whether this type of planning may be suitable for you.
¹Centre for Policy Studies, UK